Corinthian Colleges' for-profit model under fire

Dec. 2, 2012

Updated Oct. 10, 2013 5:07 p.m.

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The entrance to Everest College in downtown Santa Ana. Parent company Corinthian Colleges, an Orange County-based for-profit education company, has more than 100 campuses across the country, including Everest. H. LORREN AU JR., THE ORANGE COUNTY REGISTER

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Everest College campus President Lisa Rhodes stands near a "Look Who Got Hired" board showcasing graduates from the Santa Ana campus' programs. Diploma-program costs range from $16,000 to $24,000 for eight to 10 months, according to school officials. H. LORREN AU JR., THE ORANGE COUNTY REGISTER

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Jack Massimino, Corinthian's chairman and chief executive, said some of the scrutiny of the for-profit industry has been warranted, but he believes much of it has been unfair and driven by a political belief that for-profit companies should play no role in education. COURTESY:CORINTHIAN COLLEGES

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Bernice Olivarez of Santa Ana, at right, administers a shot to "patient" Jenny Damacio during a medical-assistant class lesson at Everest College in Santa Ana. Both have been enrolled for one month. Damacio hopes to become a medical assistant, while Olivarez is training to become a registered nurse. H. LORREN AU JR., THE ORANGE COUNTY REGISTER

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Shelle Kulik is director of career services at Everest College in Santa Ana. H. LORREN AU JR., THE ORANGE COUNTY REGISTER

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Everest College student Katie Reilly, 26, has a goal of becoming a medical assistant. H. LORREN AU JR., THE ORANGE COUNTY REGISTER

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Campus Director Sean Torre has an inspirational message written on a board in his office at Everest College in Santa Ana. H. LORREN AU JR., THE ORANGE COUNTY REGISTER

The entrance to Everest College in downtown Santa Ana. Parent company Corinthian Colleges, an Orange County-based for-profit education company, has more than 100 campuses across the country, including Everest. H. LORREN AU JR., THE ORANGE COUNTY REGISTER

Nicole McFarlin was punching keys behind a checkout register at Sears, and she was anxious to make a change.

At 20 years old, with high school and a smattering of college classes behind her, McFarlin began looking at Everest Institute, a for-profit school owned by Santa Ana-based Corinthian Colleges Inc. The school – one of more than 100 campuses run by Corinthian in 26 states – offered an eight-month program that promised to make her an expert in medical coding and billing, a job with potential in the booming health-care industry.

McFarlin didn't have the $15,000 that the Ohio campus charged for tuition, but an admissions representative assured her that the school placed 80 percent to 90 percent of the program's graduates, meaning she'd quickly have enough money to repay a loan. "I just wanted to get a better job," she said.

It didn't turn out that way.

After graduation, she found out she wasn't qualified for most medical-billing positions without an additional certification. The school helped her find a job, but the position had nothing to do with what she had trained for. Eight months after graduating, she was working as a medical-bill collector, a job requiring only a high school education. Her Corinthian diploma turned out to be tissue thin.

A stream of similar complaints has flooded the red granite office tower off the 55 freeway that serves as Corinthian's corporate headquarters. Dozens of students have filed lawsuits or demands for arbitration, charging that they were misled by the company's admissions representatives, including about their chances of landing a good-paying job upon graduation. Many say they don't believe their education was worth the price of Corinthian's tuition, which can be 17 times the cost of the same degree at a community college.

For-profit campuses such as those owned by Corinthian have played an increasingly important role in California and the U.S. as community colleges struggle to find room for students. The schools offer convenient hours and locations, as well as quick admission, making education easier for working adults. U.S. Department of Education statistics show that for-profit schools actually do better than community colleges at graduating students from two-year programs.

But the industry has faced increasing public scrutiny as it has pulled in a greater share of federal student aid – $32 billion last year – while often spending more on non-educational expenses such as promotion, recruitment of students, lobbying and executive salaries. U.S. Senate investigators found that one of every two students enrolled at 30 of the largest for-profit schools left without a degree or diploma within four months.

Even in that industry, Corinthian stands out. It aggressively raises tuition and admits that the price hikes have little to do with increased costs. It also is leaving thousands of its students – a majority of whom are minorities and those in lower-income brackets – with piles of debt. Its students have defaulted on their loans at a rate that was 64 percent higher than the industry average, Senate investigators found.

Attorneys general in at least five states have demanded information about Corinthian's operations, which include Everest, WyoTech, and Heald colleges. The Department of Education has subpoenaed documents relating to the placement and employment rates reported by an Everest campus in Georgia. And, the U.S. Consumer Financial Protection Bureau is looking into whether Corinthian and some other for-profit college companies have broken the law as they urged students to take out private loans. Corinthian's own numbers show that one of every two students holding these private loans will default.

Corinthian's stock price has dropped from $18 in April 2010 to little more than $2 today as enrollment has dropped and the company has responded to the students' lawsuits and increasing questions from state and federal officials. The company is aggressively fighting the lawsuits, and Corinthian executives say that, so far, the students have had little success.

They blame the students' complaints on bad publicity that the entire for-profit college industry has received as a result of federal investigations, including the report by a U.S. Senate committee in July.

Jack Massimino, Corinthian's chairman and chief executive, said some of the scrutiny of the for-profit industry has been warranted, but he believes much of it has been unfair and driven by a political belief that for-profit companies should play no role in education.

In an interview, Massimino noted that last year nearly 50,000 students graduated from Corinthian's campuses, and about 33,000 got jobs in their field, despite the tough economy. He noted that many of the company's graduates had earlier tried community college but dropped out.

"If we were not-for-profit," he said, "we would have statues erected to us."

Massimino, who makes $3 million a year and commutes to Santa Ana from his farm outside Park City, Utah, said the company's tuition rates are higher than those at public colleges because of the personal attention the campuses give to each student.

Classes are small. The schools offer counseling to help students who come from troubled homes. Teachers are expected to call students if they miss class. And students begin preparing for job interviews soon after they start.

"We're changing their lives," said Massimino. "We're giving them an opportunity to be something they are not. The world has passed these students by."

BIG PROMISES

To get the growth that Wall Street demands, for-profit education companies must enroll an increasing number of students every year. That drives them to spend heavily on advertising and recruiting.

Corinthian spends 25 percent of its revenue on marketing – slightly more than what the Senate committee estimated to be the industry average. It now employs 2,300 recruiters,nearly three times the 850 employees helping students find jobs.

A view of how the company conducts its recruiting efforts comes from a declaration that Shayler White, a former admissions representative, filed in court in November 2010 as part of a lawsuit brought by students. White, who recruited students at an Everest campus in Salt Lake City, said representatives got raises if they enrolled six or more students a month. If they failed to meet their quota, he said, they could be demoted or terminated. White said he was laid off for not recruiting enough students.

When he began the job, the company put him through what it called "sales training," he said, which included teaching him psychological tactics aimed at making the potential recruits feel hopeless about their circumstance.

He was trained to convince "leads" – names the company had paid to acquire – that enrolling at Everest offered them the best hope for a brighter future. The majority of these were people who had not finished high school and were unemployed.

"The ultimate goal was to essentially make them wallow in their grief," White explained in the declaration, "feel that pain of having accomplished nothing in life, and then use that pain" to persuade them to meet with an Everest admissions representative.

That case has since been settled; Corinthian officials say the students received no financial compensation.

An internal memo obtained by the Register reflects similar tactics. The memo, written by an employee of an Everest campus in Florida, encourages representatives to find out what motivates the potential recruit, whether it is a need for recognition, love of family, necessity or greed. It then offers some responses that employees can use when prospects hesitate. If the person complains that classes are too expensive, the representative is prompted to say: "I would agree if we were talking about luxuries. But you and I are talking about a necessity. Wouldn't you agree that for the lifestyle you want for your family there is no such thing as expensive/affordability?"

Another recommended response: "In many cases the increased earnings after one year will justify the cost of student education."

The company disputes White's description of its training and admissions process. It says it never has paid incentives to employees based on how many students they recruit. Kent Jenkins, a company spokesman, said White wasn't laid off for not recruiting enough students. He said the company can't legally say more about the circumstances because it involves a personnel matter. White didn't return repeated phone calls.

Jenkins added that the Florida memo never was used by representatives while interviewing students. The memo simply was notes from a 2009 meeting of midlevel employees, he said, that were "hurriedly put together."

But the company repeatedly has been accused of using misleading recruiting tactics.

The California Attorney General's Office sent nine secret shoppers to pose as prospective students at six Corinthian campuses in 2005 and 2006, according to U.S. Senate testimony.

At the Everest campus in West Los Angeles, an admissions representative told the attorney general's undercover shopper that the campus was "like the UCLA of vocational schools," and that although the admissions rep couldn't guarantee it, the person would not have "any problem getting a job." The actual employment rate for graduates of that medical-assistant program was 47 percent.

Another undercover shopper was told by an employee of the Everest campus in Alhambra that graduates of its medical-assistant program could earn $29,000 year and had the potential to make $72,000. According to the school's written disclosures, the vast majority of graduates had started at salaries between $14,400 and $22,200.

The attorney general filed a civil complaint against Corinthian, alleging that the company had engaged in a "persistent pattern of unlawful conduct." According to the complaint and Senate testimony, investigators found three programs where Corinthian employees had boosted their numbers by creating fictitious businesses where students had supposedly obtained jobs.

Corinthian paid $6.5 million in 2007 to settle the charges without admitting wrongdoing.

Jenkins, Corinthian's spokesman, said that the company now has a standardized admissions process and training program at all schools to ensure that accurate information is provided to prospective students. The company has its own mystery-shopper program, he said, to ensure that its admissions standards are followed. It also now has auditors in its corporate office to verify each campus' placement rates.

RISKY LOANS

Last year, Corinthian suddenly raised tuition by 12 percent. Executives didn't hike prices because costs had gone up. Instead, they worried that the company was in danger of missing federal targets.

For-profit schools can get no more than 90 percent of their revenues from federal student-aid programs; Corinthian has been in frequent danger of exceeding that mark. Under the law, surpassing that level could make its students ineligible for additional federal grants and loans – a devastating blow to the company's business.

To remedy the problem, the company has sometimes simply raised tuition, forcing students to put more of their own cash toward their education or to take out a private loan.

Massimino said the 12 percent tuition hike coincided with Congress' decision to raise the amount of federal aid for which students could apply, which in turn increased the company's federal revenues and took the company closer to the 90 percent limit.

"We have to raise pricing to re-create a gap," he said.

It wasn't the first time that Corinthian had used this technique. In 2010, executives told Wall Street analysts that they were considering a tuition increase of up to 20 percent at various campuses to avoid going over the 90 percent limit.

Yet Corinthian gets so much federal student aid – $1.7 billion in 2010 – that even these tuition hikes have not been enough. To get more students to take out private loans, the company has made it easy to get one. So easy, in fact, that the default rate on these loans is roughly 50 percent.

To count as part of the revenues that don't come from the federal government, the private loans must be made by a third-party lender. But to get a private lender to give its less-than-creditworthy students these loans, Corinthian has had to guarantee that it will pay if its students do not.

Most businesspeople would hesitate to lend people money if they knew that half of the sum would never be paid back. But to Corinthian, these risky loans are essential to its bottom line: They help keep the company below the 90 percent limit and keep it eligible for hundreds of millions of taxpayer dollars.

Corinthian is not the only company to employ this strategy. Many for-profit colleges have similar private lending programs.

But the practice has a growing number of critics, who point out that the private loans often have interest rates higher than those of federal loans. Corinthian told students in 2011 that the loans' interest rate was as high as 14.9 percent with an added 6 percent loan-origination fee. The company says the rate has since been reduced.

Defaulting on these loans can haunt students for years.

"Each charge-off represents an individual who cannot repay a debt and who may be facing aggressive collection tactics," wrote Deanne Loonan, an attorney with the National Consumer Law Center in a report last year detailing the industry's private lending tactics. "These student borrowers generally face numerous collection calls, lawsuits and negative entries on their credit reports that can last for extended periods of time."

And Corinthian's students are not just defaulting on these private loans. The overall default rate for its students on federal loans has been climbing rapidly in recent years. The average default rate for all its campuses jumped from 23 percent in 2005 to 36 percent in 2008, according to the U.S. Senate committee. The industry average is 22 percent.

A school's default rate is a critical measure of whether taxpayers are getting their money's worth from the loans they provide to students. A high rate is a sign that students did not get an education that led to a good job. Excessively high default rates make campuses ineligible for federal student-aid programs. Beginning in 2014, schools must not exceed a 30 percent default rate for three consecutive years or 40 percent in a single year.

Corinthian executives have found ways to lower default rates even if students aren't paying. They announced in 2010 that they would begin investing $10 million a year on what they called "default management." They hired a company called General Revenue Corp., a subsidiary of Sallie Mae, to "cure" students who were not making payments on their loans. Under the plan, a loan was "cured" by encouraging the former student to agree to defer the loan or to put it into forbearance for as long as three years. Those loans then no longer count in Corinthian's default-rate calculation – at least, temporarily.

General Revenue designated 60 employees to begin calling former students who were behind on their payments. The people considered at the most risk of default – which happens if no payments are made for 360 days – would be called as many as 110 times a month, according to an internal document. Corinthian hired two other companies to send people to knock on former students' doors. It promised students at some campuses gift certificates to McDonald's if they called to discuss their loans.

Default rates have since plummeted. At the Anaheim campus, the rate fell from almost 22 percent in 2009 to 10 percent in 2010. At Everest College in Los Angeles, the 28 percent rate of default in 2009 has fallen to 7 percent.

But it is not known if these students will be able to start making payments again when the deferment period ends. And the deferments can end up hurting students since interest often continues to accrue, leaving the student with an even bigger balance.

Loonan said that deferment can help people who currently can't pay because of unemployment or other problems. But those people also need to be provided with financial counseling so that they are better able to pay in the future, she said.

"It's a matter of pushing people into options based on what's best for the school," Loonan said. "The schools are doing this to make themselves look better. More importantly, they are doing this to keep the federal dollars flowing."

Corinthian executives said the defermentsare helping students who are facing difficulties in the bad economy. They said the company is providing counseling and financial-literacy courses to former students so that they will be more likely to repay in the future.

"The better we do for our students, believe it or not, the better we do," Massimino said.

HOPING FOR A CAREER CHANGE

When prospective students arrive in the lobby of the Santa Ana campus of Everest College, they see their names beaming from the television in the lobby, the school's way of welcoming them.

They are handed a bulging packet of information. Deep inside that packet is a document with statistics on the success of the campus' students last year, its first full year of classes. Of the 118 students who began the 10-month medical-assistant program, just 57 – or 48 percent – completed on time. The campus says 81 percent of those 57 graduates got a job in the field. Just four students of the 21 who enrolled in the campus's pharmacy-technician program completed their studies on time. One of those students got a job.

Students at the campus are older on average than those enrolling at California's public schools. Many are balancing families and jobs while trying to get their diploma.

At age 50, Denise LoBianco, of Huntington Beach, decided to enroll at the campus to become a medical assistant.

"I needed a career change," she said. "I was asking myself, 'Do I want to be a waitress for the next 25 years or do something that I really want to do?'"

She said that she had worried about returning to school in middle age, but has found Everest an easy transition, despite continuing to work six days a week. The instructors, she said, have taken extra time to help her.

She said her tuition is $23,000. The school says that those graduating with the medical-assistant diploma have landed jobs paying $12 to $18 an hour.

"I think of it as a car," LoBianco said of the cost of tuition. "I'm going to take as much knowledge as I can with me."

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